Oversupplied office property market shows signs of life amid high vacancy rates
National office vacancy has climbed as the last wave of developments are completed across major CBDs, but industry leaders say improving demand and a sharply slowing pipeline signal a market in recovery.
Australia’s commercial property hierarchy remains intact — industrial continues to lead, retail has surprised on the upside — but the office sector is now the central focus as the market works through a prolonged reset.
Fresh data shows demand across CBD office markets has strengthened over the past year, yet elevated vacancy rates and a final surge of new developments are tempering any talk of a swift recovery.
According to national market figures published this week, CBD vacancy sits at roughly 15 per cent, reflecting what industry analysts describe as the lingering impact of projects launched during the low interest rate era and only now reaching completion.
Overall, the commercial property market may have stabilised, with $49.8 billion in transactions recorded in 2025 marking the first consecutive annual sales increase since 2019. But it is the office sector that remains the clearest barometer of where the cycle turns next.
The national CBD office vacancy rate has risen to 15.9 per cent as the final wave of projects from this supply cycle completes across major capitals.
On the surface, the headline figure suggests continued softness. Yet industry leaders say the underlying data tells a more complex story, one defined by returning demand, a decisive flight to quality and sharply moderating future supply.
Property Council of Australia Chief Executive Mike Zorbas said the current rise in vacancy is supply-led rather than demand-driven.
“What we’re seeing nationally is a supply led increase in vacancy from projects that started three years ago and are largely pre-committed,” Mr Zorbas said.
“This is now the fourth consecutive six month period of positive demand based on the recovery of interest in prime office space.”
With fewer new developments entering the pipeline, he added, “a lack of new supply is set to underpin a recovery in office.”
Strongest demand since 2022 but supply overwhelms
Tenant demand has strengthened materially.
Australia’s CBD office markets recorded their strongest occupier demand since 2022, with national net absorption reaching 135,279 square metres over the 12 months to January 2026.
However, 389,514 square metres of new CBD supply was delivered over the same period, pushing vacancy to 14.8 per cent in JLL’s dataset and leaving a substantial oversupply that could take years to absorb.
The mathematics are sobering. With total vacancy sitting at approximately 4.36 million square metres nationally, even sustained positive absorption will require years to materially tighten conditions.
Sydney: quality drives demand
Sydney’s CBD vacancy rate sits at 13.8 per cent, broadly steady but deeply segmented.
Anita Hugo, NSW Executive Director of the Property Council of Australia, said the market is far from uniform.
“Sydney’s CBD is steady, but it’s not a uniform market. Demand is concentrating in the buildings that offer the right mix of location, amenity and performance,” Ms Hugo said.
She added that “quality is doing the heavy lifting” as businesses consolidate into better buildings, often using less space overall but demanding more flexibility and environmental performance.
The supply side remains significant. Over the past year, Sydney CBD saw 84,553 square metres of new stock added.
Queensland leads national absorption
Queensland emerged as the standout state performer.
Brisbane CBD recorded annual absorption of 37,480 square metres, the strongest result nationally, though vacancy edged up to 11.8 per cent following the completion of major projects, including 360 Queen Street.
Jess Caire, Queensland Executive Director of the Property Council of Australia, said the rise in vacancy should not be mistaken for weakening fundamentals.
“This is not a demand-side issue. Brisbane continues to experience strong underlying demand, particularly for premium office stock,” Ms Caire said.
“The major limiting factor is the cost and productivity hampering new supply.”
Without greater certainty, she warned, “projects simply do not stack up,” raising the risk of premium undersupply later this decade as Brisbane’s pipeline dries up.
The Gold Coast and Sunshine Coast added further strength, with the Sunshine Coast recording just 3.4 per cent vacancy.
Melbourne: highest vacancy in the nation
Melbourne continues to record the nation’s highest vacancy rate at 19 per cent, up from 17.9 per cent six months earlier and the highest level since 1997.
Yet beneath the headline figure, demand has improved. Around 100,000 square metres of new supply entered the market in the second half of last year, while net absorption rebounded to 28,000 square metres, compared with negative 45,000 square metres in the same period a year earlier.
Cath Evans, Victorian Executive Director of the Property Council of Australia, said the arrival of major premium projects reflects long-term confidence.
“Melbourne remains an attractive destination for employers … a real opportunity for tenants who are able to capitalise on renewed interest in the market,” Ms Evans said.
However, she warned that policy settings are weighing on investor sentiment.
“It’s vital that we make policy changes that unlock new private investment to rejuvenate office assets that will enhance the overall vitality of central Melbourne.”
She argued that tax reform, regulatory certainty and planning efficiency would be critical to narrowing the gap between Melbourne and other capitals.
Canberra, Adelaide and Perth show divergent trends
Canberra remains one of the strongest performers, with vacancy easing to 10.2 per cent.
Ashlee Berry, ACT Executive Director of the Property Council of Australia, said the challenge lies in the CBD, where vacancy remains at 12 per cent.
“Canberra is holding up better than many capitals, but the real story is still the CBD … vacancy is too high for the heart of our city,” she said.
Adelaide recorded annual absorption of 33,023 square metres, with vacancy at 15.5 per cent.
Bruce Djite, SA Executive Director of the Property Council of Australia, said the figures reflect “strong net demand of just over 10,000 sqm … notwithstanding the increase in vacancy driven by above average new supply.”
“A Grade and well located buildings continue to attract tenants,” he said.
Perth has entered an unprecedented supply pause. Vacancy declined slightly to 16.9 per cent, and for the first time since the Office Market Report began in 1990, no new CBD supply is expected for three consecutive years.
Nicola Brischetto, WA Executive Director of the Property Council of Australia, said Perth CBD “has officially entered an unprecedented drought of new office supply entering the market.”
The supply gap, she said, “is expected to put downward pressure on vacancy rates,” creating “a unique opportunity for businesses … before the existing supply is taken up.”
Interest rates reshape the outlook
The broader economic backdrop remains complex.
Inflation rose to 3.8 per cent in the 12 months to December 2025, prompting the Reserve Bank of Australia to lift the cash rate to 3.85 per cent in February, the first increase since late 2023.
Ronak Bhimjiani, Director – Research at JLL, said investor focus has pivoted decisively toward income growth.
“The RBA faces a complex balancing act: curbing persistent inflation without derailing economic growth, particularly as the labour market begins to ease,” he said.
Mr Bhimjiani said sectors underpinned by long-term structural drivers, including demographic shifts and technological advancement, are expected to demonstrate the greatest resilience in the current environment.
“Investor focus is pivoting towards securing income growth, as the market has now largely priced in the recalibration of asset values from higher interest rates,” he said.
“Assets that can generate income streams that outperform inflation are becoming the primary driver of investment strategy.”
A market in transition
Across Australia, the office market is digesting the final phase of a supply cycle launched under very different financial conditions.
Some cities, notably Brisbane and Perth, are heading into periods of constrained supply. Others, like Melbourne, face a more policy-driven challenge. Everywhere, the divide between prime and non-prime assets is widening.
As Mr Zorbas observed, “the medium-term outlook is more balanced than the headline vacancy rate alone would suggest.”
The correction appears to have passed. The recovery, however, will be measured and led by quality.
